Author: VU Faculty
Do you have a good handle on your accounts receivable for agency-billed business? How do you measure up to industry standards or best practices ranges?
"As an independent agency that is 75% commercial and, of that, over 95% agency-billed premium, we are constantly concerned with our accounts receivables. Are there statistics of what are acceptable receivable percentages as compared to premiums? Or are there industry averages or best practices ranges of acceptable levels of aged receivables?"
We ran this by our agency management gurus and got the responses below. Note that one of them refers to an excellent publication from the Academy of Producer Insurance Studies.
The best way to approach this logically is by first calculating your annualized agency billed premium. Since premiums are due the carriers in 45 day cycles, you may have 12% (on average) of agency billed premium in receivables and still be fully within company payment terms without using agency money.
If you have over 15% of agency billed premiums in receivables over an extended period, you are likely using agency funds to pay client’s premiums. The other calculation that should be done on a monthly basis is the calculation of the Receivables : Payables liquidity ratio. Healthy agencies have (premiums) Receivable : (carrier) Payables of less than 75%.
It seems that your agency has a very high percentage of agency billed accounts. We are seeing numbers more in the area of 25% to 40%. Is this because the agency wants the float? Or is it because you represent companies that don't offer direct bill for the types of accounts you write?
You also didn't mention as to whether or not you feel you have a problem with receivables.
However, good managers should always be concerned about receivables. We preach to our clients that it is not an account until you have the money. So very strict guidelines on money before binding is imperative and payment in full by the time the account is due to the carrier. If the client is not capable of paying in cash that by all means pick a premium finance program and get it financed. I assume you are using installment pay plans offered by your carriers. If so it is important to set up your billing so that you are collecting 30 days ahead of time.
As far as ratios we use these as a guideline:
Total Customer Receivables ($) divided by Total Company Payables should be less than 55%, 30 days acceptable is 35%, 60 days acceptable is 5%, Over 60 days 0%.
If you have producers, then you should have an agreement that they are personally responsible for any premium to the agency that goes over 30 days. You might be surprised at how collections improve if you have a problem.
There are those who will tell you that receivables should always be at -0- and in a perfect world we agree. Unfortunately we don't live in a perfect world.
The real danger of receivables comes if they are old and that is why we believe that there should not be anything over 60 days. Of course there are always good reasons like an endorsement received that is wrong and you are waiting for a correcting endorsement which will refund some of the premium, etc. We all know about those. This may be the perfect time to make sure you are using your agency management system's features to assist in controlling this data.
You did not mention which system you are on. If you would like to share that information perhaps I can provide additional information to assist you in getting the best information and services.
Visit the Academy of Producer Insurance Studies at www.scic.com. They have a publication, Growth and Performance Standards, that provides statistics for various ratios by agency size and region.